Time for TOUGH DECISIONS

With inefficiency prevailing in the power sector, from generation to distribution, bringing in changes is a big challenge
Noor Mohammad Delhi

Another term for the incumbent UPA government at the Centre is good news for the Indian power sector as it would entail continuity in the existing policy. And what is more, this time the Congress-led government can pursue policy making without worrying about Left's pressure unlike the first term. However, fixing the Indian power sector remains a tremendous challenge, with inefficiency pervading from generation to distribution. The lack of political will in state governments on implementation of critical reform measures to cut power losses and improve fiscal health of electricity boards complicates things. Apart from persuading states on reforms, the new government at the Centre will also have to take some tough policy decisions if it wants to clean up the mess in the Indian power sector.

For one, the government will need to remove key policy bottlenecks hampering private competition in equipment supply if India is to add power generation capacity at a pace commensurate with the growth in electricity requirement.

The success of opening up key infrastructure sectors like telecom and civil aviation to private competition in the past decade should be enough to allay any misgivings the government might have. The government's move to introduce competition in these sectors has brought tremendous benefits to consumers. Entry of private players has helped to improve service quality and lower prices in these sectors. But at the same time, service providers have also seen exponential growth in their revenues as falling prices helped them to attract new customers.

So, there does not seem to be any logic in keeping barriers high for private competition in the domestic power equipment sector when empirical experience tells that liberalisation can work wonders. It only raises the cost of electricity supply for consumers. This also adds to the input cost of the Indian industry and dents its competitiveness vis-à-vis overseas players.

If the government were to open the sector for private competition, public sector equipment manufacturer Bharat Heavy Electricals Ltd (BHEL) will feel the pressure to improve its efficiency and lower prices. The company has already cut its price by five per cent to beat competition from Chinese manufacturers. "We are trying to wean away customers from Chinese competitors," BHEL Chairman K Ravi Kumar was quoted as saying. He added that BHEL's margins would not be affected as the company had 20 per cent cost advantage over its Chinese competitors.

BHEL was forced to start manufacturing of 600 MW sets after it lost some contracts to Chinese companies. Since then, the company has bagged many contracts for the supply of 600 MW plants. BHEL is offering this set at a price just 12 per cent higher compared to the 500 MW plant package. That translates into cost savings of eight per cent per MW capacity for developers choosing 600 MW plant package over 500 MW equipment. The reduced equipment cost means lower electricity tariff for the installed plant. This shows how consumers can benefit from reduction in power equipment costs.

Apart from one-time profits on supply of main plant package, BHEL also makes money throughout lifetime of power plants by supplying spares and maintenance work. So, it is clear that there is a lot of rope in prices charged by BHEL for equipment supply through negotiations. Since Central and state governments provide budgetary support to utilities, they will also benefit if power equipment prices come down.

India is facing acute power shortage due to the failure to add power generation capacity at a required pace. However, the government does not seem to have learnt its lessons. For example, while finalising policy for procurement of supercritical power equipment recently, the government has put in the conditionality of domestic manufacturing. This is apparently aimed at keeping out foreign vendors, say industry experts. 

Significantly, the Union power ministry has envisaged the bulk of capacity addition through supercritical equipment, which are more energy efficient compared to sub-critical plant. Supercritical is a new technology in which BHEL hardly has any expertise. It's still not clear how the government is going to meet its capacity addition target in the current Plan.

On belated realisation that BHEL is not in a position to meet its power equipment requirement, Central public sector power generator NTPC has forayed into equipment manufacturing. This is nothing but a desperate move on the part of NTPC and reflects bottlenecks in India's power equipment manufacturing sector. As a matter of strategy, NTPC should have stuck to its core business of power generation. Equipment manufacturing is not its area of expertise, industry experts told Hardnews.

The new government will also be required to amend bidding evaluation criteria for ultra mega power projects (UMPPs), which favour domestic players over overseas ones. The UMPP scheme was launched by the UPA government to attract foreign investment into power generation. However, out of the four UMPPs bid out by the government so far, three have gone to a single player that is, Reliance Power. It is obvious that the scheme has failed to serve the intended purpose.

Domestic private power generators have bid aggressively for these UMPPs for the lure of captive coal mines allocated by the government along with them. In a further relaxation of the policy, the government has allowed developers the flexibility to divert excess production to other power plants.

Implementation of UMPPs would entail funding requirement in the range of Rs 20,000 crore each. What happens if Reliance Power fails to implement allocated projects due to financial constraints?

A big chunk of the country's potential in hydro generation is lying idle due to inter-state disputes. The Central government should put in place measures to ensure speedy disposal of disputes and pave the way for harnessing this energy resource. These projects can also be awarded to a Central utility like NTPC or NHPC if the states cannot agree. NTPC has already shown its interest in taking up these projects.

Independent Power Producers' Association of India (IPPAI) identifies poor implementation of open access in power transmission by certain states as a major problem threatening to derail the Central government's pro-investor policy initiatives.

"Section 11 of the Electricity Act is being invoked to deny open access and arbitrary tariff reductions on the sale of power are being made. State regulators, who were supposed to be independent, are being forced to toe the state policy line by way of directions being issued to them under Section 108 of the Act," IPPAI told Hardnews.

Under the federal structure of governance in India, the legislative powers of the Centre and the states have been demarcated. Under Entry 38, List III, both the Parliament and the state Legislatures have been empowered to make laws on the subject of electricity. The Constitution has, however, given supremacy to Central legislation, meaning thereby that if there is a direct conflict or inconsistency between a Central Act and the provisions of a state legislation, then the law made by the Parliament shall prevail and the inconsistent provisions of the state legislation shall be void. 

"This federal structure and differing jurisdictions of the Central and state governments and commissions pose a formidable challenge in fostering power operations in the country and allowing the power flows to be consistent with the underlying economics," the industry body said. "Global environmental concerns are driving a greater focus on renewable energy. We propose to discuss regulatory, legal, fiscal, tariff and minimum procurement support for incentivising wind, solar and biomass energy and focus on the new policy for trading of energy efficiency certificates and how it will work," it said.

"Further, cogeneration, captive power plants, and hydro-electricity may also require a detailed examination of the underlying regulatory, legal and fiscal issues. Lastly, recent threats to the security of energy assets by subversives may require preparation for managing business disruptions that may result as a consequence," the power industry association said.

Meanwhile, industry body, Associated Chambers of Commerce and Industry (Assocham), has envisaged an action plan on the power sector for the new government. "Power forms the centre piece of the entire economy as its deficit and quality affect every part of it. Except for one or two states, most suffer from large power cuts. Cost of power supply is increasing. There are both hidden and direct subsidies to keep the power tariff low in order to please the users. The quality often is poor affecting the machinery that runs by power," says Assocham in a recent research report.

"Inefficiencies are in-built at every stage of power from generation to use. The disease and the remedies are well known but the political will to implement the changes is lacking. As a result, every party takes the easy path of contradictory policies. So, the power situation fails to improve in any state," the Assocham report says in its finding.

"If the promise to improve the situation is sincere, the first thing to do is to implement the provisions of the Electricity Act, 2003 and make theft of power a crime under Criminal Procedure Code (CrPC). It is not enough to implement the Act partially. The principles underlying the Act, namely Private Public Partnership (PPP) model in generation, transmission and distribution, should be stuck to even at the risk of annoying sections that benefit by the present situation," the industry body recommends.

"With installed capacity of 1,43,000 MW, even a 10 per cent saving in the power use could add 14,300 MW to power availability. T&D loss is between 35 and 50 per cent.  It is simply due to theft," the report finds.

The Assocham report says that political parties must realise that the cost of power to the consumer is rising partly due to persistence of theft and inefficiencies at every stage of power use. Government subsidies to keep the cost constant to the urban consumer and
give free power to the rural one only perpetuate inefficiency and theft. If the situation is not improved through surgical intervention against vested interests, the more power is produced the more would be the basic loss leading to an unacceptable situation soon.

On the generation side, the adoption of cost per unit as the criteria in selecting the bidder is a big jump in improving the power situation. There are, however, other problems in awarding construction contracts on Build-Operate-Transfer (BOT) basis that have stalled the proposed super thermal stations. These have to be attended to keeping in view the large investments needed in the sector.

"Cost of thermal power is about Rs four to six crore per MW. Private enterprise that volunteers to find such resources for a 4,000 MW power unit should be treated with understanding and not bureaucratic unconcern," the report adds.

"Power generating units would have to steadily go for super sized ones in the range of 900 MW and more per unit to improve efficiency and reduce cost per unit. While the indigenous BHEL should get priority, there is scope for more generation equipment factories to come up in view of the plan to add one lakh MW capacity to be added every five years reaching upto three lakh MW capacity building by 2020," the report says.

The Assocham report also suggests that the Indian government intensify efforts at tapping hydro resources in the North-east as well as in neighbouring countries such as Nepal and Bhutan. This would help in attracting big-ticket investment in the North-eastern states.

"India would have to negotiate with Nepal on tapping the hydro power resources of the rivers originating from that country. The negotiations should be on the basis of such power generation benefiting Nepal also while Indian capital builds the system. Hydro-power potential of the North-east should be fully utilised providing a major attraction for locating certain power intensive industries in the North-east. This linkage would encourage the North-eastern states to participate in the setting up of the infrastructure," the report says. Assocham also suggests policy changes by the Central government to attract more foreign investment in the power generation.

"International power generating companies are eager to build generation systems in India. In view of the large investments needed in power generation, foreign companies should be welcomed in this area subject to lock-in provisions and security concerns," the report says. 

Further, the report argues for creating a balanced mix of thermal, hydro and nuclear power to bring down the carbon emission level as a part of the strategy to fight global warming.

"There should be a balance between thermal, hydro and nuclear power. Now that the Indo-US nuclear deal has opened up the nuclear power generation to foreign capital and enterprise, efforts should be made to raise nuclear generation capacity to at least 40,000 MW by 2020 and 60,000 MW by 2025," Assocham says.

"Renewable energy, especially solar energy, should be a matter of priority in order to reduce our dependence on coal and oil and also adhere to anti-climate change goals. Large scale use of solar cookers, solar lanterns and decentralised renewable systems should be promoted with specific targets in rural areas. Towers and other equipment for wireless transmission should be linked to use of solar power generation. In rural homes, solar lanterns are an economic proposition rather than the power distribution over long distances. However, more research and development is needed in this area for which investments must be set apart," the report says.

 

This story is from the print issue of Hardnews: JUNE 2009